South Carolina Supreme Court: Lenders Modifying Loans Do Not Engage in Unauthorized Law Practice

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The South Carolina Supreme Court recently ruled that lender loan modifications do not constitute the unauthorized practice of law. The issue before the court in Crawford v. Central Mortgage Company and Warrington v. The Bank of South Carolina, which had been consolidated on appeal, was whether lenders engage in the unauthorized practice of law by preparing and mailing loan modification documents to borrowers and recording the executed documents without a licensed attorney's participation.

The court observed that the practice of law goes beyond litigation and applies to activities in other areas involving specialized legal knowledge. Further, protecting the public is the driving force behind jurisprudence concerning the unauthorized practice of law. Determining whether an activity constitutes the practice of law is, therefore, flexible and fact-specific.

The unauthorized practice of law in other real estate transactions has previously been addressed by the court, which ruled that attorney supervision is required in residential purchases and refinances. That precedent was set in 2003 in State v. Buyers Service Co., Inc., and Doe v. McMaster. In those cases, the court divided the residential real estate purchase into four steps requiring attorney supervision: conducting a title search; preparing loan documents; the closing; and recording title and the mortgage.

The court distinguished the present case, however, finding that unlike a refinance transaction, which involves the creation of a new loan agreement, a loan modification merely adjusts the existing loan to accommodate borrowers in default.

In addition, the court found that public policy considerations requiring attorney supervision in home purchases and refinance transactions do not apply in the context of a loan modification because requiring attorneys to supervise loan modifications would impose an undue burden on borrowers. Further, borrowers negotiating loan modifications are protected by a "robust regulatory regime and competent non-attorney professionals."